The government of President John Atta-Mills has made the fight against inflation and the strengthening of the cedi central planks of its economic development programme, the “Better Ghana” agenda.

As a result of the government’s efforts to wring out inflation from the economy, it has maintained a fairly tight grip on public expenditures since 2009, making the subject of inflation now a near-household subject amongst not just economists, but also industrialists, foreign investors, traders and ordinary Ghanaian consumers. Equally, importers and exporters, foreign investors and Ghanaians in the Diaspora keep close track of the exchange rates of the new Ghana cedi.

Increasingly, news about inflation trends is something Ghanaians now seek out. The media regularly watches for news about changes in the general price level. The working class, most of whom earn fixed incomes and are aware that they can be severely taxed by inflation, monitor the trend to determine the ‘appropriate’ time to pitch for a raise.

In this government anti-inflation fight, a key official who has emerged as the field commander of operations is the Finance and Economic Planning Minister, Kwabena Duffuor. A former Governor of the Central Bank, former chairman of Unibank, one of the private banks in Ghana, and a holder of a PhD in Economics from Syracuse University, Dr. Duffuor is credited with succeeding in convincing the President’s considerable retinue of economic advisers to let the economy and the population take the pain of anti-inflationary measures in the first two years of management of the economy under the ruling NDC government that was installed in January 2009.
It is then expected that as oil revenues flood the government’s bank accounts next year and onwards, more ‘reflationary’ policies could be emplaced to spur job growth and general expansion.

Dr. Duffour is satisfied with the results the government has achieved, so far. “When we came government was borrowing at (91-Day Treasury Bill rate of) about 24 percent but now we are borrowing at 12. 3%. The currency was depreciating very fast. Now for 14 to 15 months, the Cedi has been quite stable. These two developments would pull inflation down naturally, hence the decelerating in the inflation rate,” Dr. Duffour said in an exclusive interview with GB&F on November 2, 2010.

He admits however that, the full positive impact of the decline in inflation has not been felt, particularly, as it has not translated into equally sharp declines in bank lending rates to benefit the private sector. “The banks are not able to bring their lending rates down as fast as we would have preferred because of the way the industry was managed in recent past,” he said.

He explained: “When you allow many firms to enter the same industry within a short period and you don’t have a very efficient regulatory system, there will be chaos because they will enter and compete for the scarce resources within that industry.  About 7 banks entered our banking industry within two years and they had to compete for even workers, besides competing for deposits which were not going to grow very fast and therefore the banks were prepared to pay between 28-30 % for time deposits.”

“We now have very efficient treasury managers, who lock themselves in for between six months to one year. So if you are a banker and you take a time deposit for 30 % for one year, there is nothing you can do. You can’t unwind, until it matures. So until the time deposits mature the banks will stay with the high cost of borrowing.” The challenge in January 2009 when President John Atta-Mills’ government came into office was to address the macro-economic imbalances such as high budget deficit, rising inflation and falling foreign reserves inherited from the previous administration of now former President John Kufour.
The austere budget of the Mills’ government sought in the first year to bring down the budget deficit from nearly 15% of GDP in 2008 to 9% in 2009, reduce inflation from 18% in 2008 to 12.5%, and increase gross foreign reserves to more than two months of import cover for goods and services.

So far, thanks to the government’s resolve to keep the ‘spending taps’ in check and continued stability in commodity prices, particularly oil, the inflation rate is trending down. By the end of September this year, the rate of inflation had fallen 15 consecutive times since June 2009. The cumulative decline between January and September this year was 5.4 percentage points (from 14.78% to 9.38%). The consistent drop in inflation, according to the Ghana Statistical Service, has been driven largely by low food inflation and declining trends in non-food inflation.

The decline in the food component of the Consumer Price Index has been greater than the non-food component, with food inflation recording single digit rates since January this year; falling from 9.1 % to 5.7 % in September. Food prices are expected to remain stable as the period from July to October is the traditional bumper harvest season for most food staples in Ghana. Therefore, adequate supply of foodstuffs on the market is expected to help contain food prices and further reduce the rate of food inflation from September till end of the year. But pundits argue that an austere budget is probably the only option when a new government inherits an economy that is already living far beyond its means, with very little domestic revenue to go round the numerous planned public expenditures. The situation could have been worse for the Mills government if an import-dependent country like Ghana was faced with escalating oil prices and sharp depreciation of the Cedi as was observed two years ago.

Then, former President Kufour’s government chose to resort to high expansionary fiscal policy in 2008, to counter global food and fuel prices as well as the depreciation of the Cedi. The now opposition NPP often cite the external factors to defend itself against the charge by the Mills’ government that it inherited from the NPP, an economy that Finance Minister Duffour said, “was
characterized by severe imbalances that put economic growth and poverty reduction aspirations of the country at serious risk.”

Surely, President Mills’ government’s strong resolve to keep public spending low in order to reduce inflationary pressures has been a very important part of the, so far, successful fight against inflation.

This, of course, has been at the cost of postponing some expenditures hoped for by the ruling NDC Party, leading to some complaints from the public about the speed of the Government’s actions. But the real test of government’s resolve is yet to come. Currently, Ghana’s main exports, cocoa and gold are enjoying rising prices whilst oil prices remain relatively stable. This means Ghanaian exports should be bringing in significant amounts of foreign currency to support the value of the Cedi. Indeed, data from the Bank of Ghana shows that the Cedi regained stability in 2009 after free-falling in 2008 against the three major trading currencies; the US dollar, the British pound and the euro.

The stability of the Cedi continued this year and by June 2010, had appreciated by 3%, 13% and 18 % (year-on-year) against the dollar, pound and the euro respectively. Perhaps, the bigger test has been deferred to 2012 when the country will be going to the polls again. Election years in Ghana are associated with significant jumps in budget deficits because that is when governments find it difficult to resist the urge to woo voters with developmental projects and in some cases, various kinds of cash incentives.
Consequently, huge budget deficits have become a permanent feature of Ghana’s fiscal position, which have since 1992 become cyclical and tend to worsen in election years. For example, in 2000, the election year that brought former President Kufour to office, the country run a deficit of 8% of GDP. This figure nearly doubled to 15% in 2008, the election year that brought current President Mills to office.

The major sources of Ghana’s fiscal deficits over the years have been the large public sector wage bill and unplanned government spending. Add to these, the tendency of governments to accumulate arrears to suppliers and contractors which are often redeemed in election years with further debt built-up. Ghana’s expenditure over-runs are usually on recurrent budgets while the capital expenditures are reduced.

As a result, the focus on recurrent spending tends to fuel inflationary pressures as the resulting growth in money supply is often not backed by a corresponding increase in economic productivity. For example, in 2009, there was a revenue shortfall equivalent to 1.9% of GDP, while in the case of expenditures, the wage over-run and domestic interest cost exceeded budgeted targets by 0.6% of GDP in each instance. The excess expenditures
over revenues are typically financed by borrowing from the domestic banking system, divestiture proceeds and external sources.

A new tax authority

Finance and Economic Planning Minister, Duffuor, is aware that the challenge is to improve tax revenue collection through appropriate reforms and to strengthen tax agencies to make them more effective and efficient, while at the same time, strengthening public expenditure management. Recently when he inaugurated the new Ghana Revenue Authority, the body that emerged out of ongoing tax reforms, Dr. Duffour said: “We should not underestimate the task of forging an integrated authority from three agencies that have operated as autonomous institutions for decades while simultaneously sustaining and improving on the revenue collection efforts.”

The new tax authority has become a one-stop shop that oversees the activities of three, hitherto, autonomous revenue agencies; Customs Excise and Preventive Service, Internal Revenue Service and Value Added Tax Service. The authority is expected to put in place measures to overcome challenges including unprofessional conduct and compromise of integrity which gives rise to collusion with taxpayers to evade tax, corrupt practices and rent seeking by its officers. Tax payers in the formal economy also hope that the new tax authority will be more successful than in the past in roping in the large percentage of the population in the informal sector of the economy most of whom do not pay any income tax at all or highly discounted amounts. There is also an accepted view that most properties in Ghana are heavily under-taxed and that aspect requires urgent review.

Actually, the fight against inflation will take more than boosting revenue flows in order to contain recurring expenditure over-runs.  A lot would also depend on how budget deficits are financed.
Over the years, governments have mainly resorted to borrowing from local banks, often leading to over-crowding of the private sector, a phenomenon that leaves very little money in the banks for private businesses to borrow to expand their operations.

Even though, government still borrows from local banks to finance budget deficits, continued easing of inflation expectations has shifted demand for government securities towards long-dated instruments - a situation which now allows government more breathing space to pay its debts. This in turn, has led to significant increase in foreign investor confidence in government securities, thus, freeing local banks to expand lending to private business people. For example, this year’s floatation of a 3-year fixed rate bond attracted strong foreign investor interest, resulting in their share of government securities increasing to 17.6% in June 2010 from 9.6% at the end of 2009.

The steady slow down in inflation expectations has been followed by a reduction in the Bank of Ghana monetary policy rate which in turn has triggered similar declines in the inter-bank interest rates. Following the 300 basis points cut in the Bank of Ghana monetary policy rate in the first half of the year, the average base and lending rates of local banks started declining.
Average base rate quotations of the banks reduced by 277 basis points in the first half of 2010 from more than 30% to 28.63% while lending rates dropped by 212 basis points to 30.63% in June.

Increased competition has since pushed down the rates further with some banks quoting new base rates of 21% in October, whilst dollar based domestic loans by some of the banks have hovered between the 12-14% range.

Whilst some public sector workers who are signed on to it have already started raising issues with the new salary structure, others yet to be rolled on, are running out of patience and have threatened to go on strike.

Economist Nii Moi Thompson thinks wage increases in the country should be tied to a corresponding increase in productivity. Commenting on the rising number of industrial disputes in the country, he told local media: “Until we make an effort to remove massive inefficiencies in the system, public spending will become unsustainable and ultimately collapse and we are going to have chaos.”

Most employers and investors naturally would support any rationale performance-based compensation scheme that will enable workers to be paid against real measurable output.

“If we were to implement the single spine salary structure at a go, inflation will start soaring. We are not going to migrate all public sectors workers onto the spine within one year. Not at all, it will take about 5 years. So we don’t expect the single spine salary structure to affect inflation this year not even next year,” says Finance Minister Duffour.

“Some economists have said because of the single spine salary structure, inflation will go up and they leave out the management aspect of the implementation process. Managing the economy requires a lot of managerial skills. The single spine must be managed carefully and that is what we are doing now,” he added. The Finance and Economic Planning Ministry has proposed the introduction of legislation that will allow it to play a key role in the determination of salaries and emoluments for public servants. It is believed this would allow the ministry to better monitor the activities of government ministries, departments and agencies (MDAs), especially how they negotiate salaries. Under the current arrangement, many of the public agencies under some ministries, especially those that generate some revenues, determine their own salaries and allowances which they then take to the Finance Ministry to find the money to pay, a development which ministry sources say is becoming “very problematic.”

A recent visit by an IMF mission to Ghana asked government to strive to reduce fiscal deficits and its associated public borrowing in order to sustain gains made in the positive trends in inflation and other macroeconomic variables. The fiscal deficit in the first half of this year was 5.3% of projected GDP, slightly above the ceiling for government’s IMF supported programmes. This year’s budget deficit is projected to hit 8% of GDP, which will be marginally off the target of 7.5%. It remains to be seen how well government will resist the temptation to over-run public expenditures or rake in sufficient levels of revenue, in order to sustain the current trending down of inflation.

So the inflation-fighting under Minister Duffuor continues unabated, but the business community and the general public are hopeful that competition amongst the banks will bring down lending rates and help to give Ghana that financial stimulus that is needed to buoy up the economy.